Market Internals

Introduction

I won't be the first one to remind subscribers that today is the three-year anniversary of the Flash Crash. With the fake terror-related tweets from April 23 driving prices momentarily lower, it's an anniversary we can hardly forget. That's especially true when pundits assure us that more flash crashes will occur in these days of high-frequency trades and social media delivering news.

No flash crashes occurred today, however. Despite weak European markets as the U.S. market day began, both the Dow Jones Transports and the NDX rushed up to new recent highs soon after trading opened. The SPX and RUT needed longer to accomplish that goal, and the Dow Jones Industrials lagged all of them, never achieving a new high. The Dow was markedly weaker by comparison. Throughout most of the day, until the middle of the afternoon, Dow decliners were beating advancers, although advancing volume tended to be above declining volume, thanks to BAC and a few other stocks. Other indices saw much stronger volume patterns throughout the day.

The SPX gained 0.19 percent, the Dow lost 0.03 percent, and the NDX gained 0.37 percent. The RUT gained 0.56 percent, and the SOX, 0.57 percent. Volatility indices were little changed. I'm not certain anyone actually came to trade today. Combined NYSE and NASDAQ volume equaled only 4.56 billion according to one source.

The dollar gained. Bonds dropped, with ten-year and thirty-year yields climbing 1.08 and 0.67 percent, respectively. Although crude jumped, perhaps due at least in part to the heightened tensions in Syria, other dollar-denominated futures were mixed. Gold futures (/gc) for June delivery gained 3.8 percent to settle at 1468.0, with some experts positing that easing in China will increase demand for gold. Silver futures (/si) for July delivery fell 0.057 percent to settle at 23.918. Copper futures for July delivery dropped .0040 percent to close at 3.105. Crude futures (/cl) jumped to 96.12.

Monday's Developments

Asian bourses gained with the exception of the Nikkei 225 percent, closed Monday for a holiday. The Hang Seng gained 0.99 percent, and the Straits Times, 0.37 percent. Both these indices followed the U.S.'s pattern Friday, with prices jumping up near the open and trending sideways the rest of the day. China's Shanghai Composite gained 1.17 percent. This Chinese bourse gained despite a disappointment in the HSBC services Purchasing Managers' Index. April's decline to 51.1 was driven by a slowing of staffing levels and new orders. New orders fell to 49.6, nominally into the contraction zone. Some experts speculate that this result and others from last week might prompt the government to cut interest rates while other experts point out that housing inflation will not allow efforts to ease without risking a housing bubble.

While China gained after a disappointing number, European bourses might have been impacted by weak numbers. Both Spanish Services PMI and Eurozone Sentix Investor Confidence proved weaker than expected. In addition, the ECB's Mario Draghi said that the central bank was prepared to act when needed. Amid these developments, the euro dropped against the dollar.

European declines were modest, however. The FTSE 100 percent was closed for the country's May Day celebration. The DAX eased 0.13 percent, and the CAC 40, 0.15 percent. Spain's IBEX 25 dropped 0.48 percent, and Italy's FTSE MIB, 0.35 percent.

In the U.S., the economic calendar was empty of big market movers. Economic releases today included Moody's Weekly Business Confidence Survey, reported at 10:00 am. After topping out at 32.7 in the March 18 report, the survey dropped several weeks, finally inching up again last week. Today, the rebound was stronger. The survey number jumped to 30.2 from the prior 28.6. The survey number was not likely to have been behind the market gains this morning. This doesn't appear to be a widely watched number, not appearing on some economic calendars.

The Loan Officer Opinion Survey was reported at 2:15 pm, but attention had already been focused on the housing and mortgage business. Over the weekend, the Mortgage Bankers Association held a conference and concluded that, while problems remained, a positive market recovery appeared to be underway. Those problems include shrinking access to credit at the lower end of the spectrum. Upcoming guidelines such as Basel III and the Qualified Residential Mortgage Standard, and frequent changes in guidelines for Fannie Mae, Freddie Mac and the Federal Housing Finance Agency lead to caution on the part of lenders.

The Federal Reserve Board's summary of the April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices noted that domestic banks had eased their lending standards on balance and had seen stronger demand for several loan types. Competition to loans sometimes led to the easing of standards or terms on many business loans.

The Federal Reserve Board's picture of household loans was mixed. Demand for prime residential mortgage loans had strengthened, but on net, only "a few" domestic banks had eased standards for those loans. Also "a small net fraction" of institutions had eased standards on auto and credit card loans. Mostly those terms were unchanged. Terms for loans to European banks hadn't changed much. Fewer domestic banks were seeing competition from European banks.

Institutions reported that those home purchase borrowers with FICO scores of 680 or 720 were seeing terms and availability of GSE-eligible home purchases roughly unchanged from a year ago. However, if borrowers wanted FHA loans and had low FICO scores, institutions were less likely to approve those loans, corroborating the information disseminated at the MBA conference over the weekend. In addition, few institutions offer private student loans. Those that did had not changed terms significantly over the last year.

Story stocks today included Berkshire Hathaway Inc. (BRK.B, 110.00, up 1.36 or 1.25 percent), wrapping up its popular yearly meeting with shareholders last weekend. Although most coverage pointed out that shareholders asked the same questions and received mostly the same answers, Warren Buffett did make efforts to answer all questions. That included those questions from invited skeptic, hedge-fund manager Doug Kass. That invitation must have been proffered under the spirit of keep your friends close and your enemies closer. Kass, well known for shorting the stock, challenged Buffett to provide $100 million for Kass to manage, with gains to be donated to charity. Buffett declined to accept the challenge.

Also of interest to some investors was Buffett's proclamation that bonds are a poor investment right now. He believes equities have many more gains ahead. Please remember that Buffett's pockets and timetable for these gains may be more generous than those of retail traders. In fact, his timetable appeared to be "in your lifetime."

Berkshire Hathaway reported earnings according to A share positions. GAAP EPS was $2977 for A shares versus an expected $2275. Revenue was $43.87 billion, more than the expected $42.21 billion.

Outside the meeting, Buffett was still making news, this time for supporting Jamie Dimon at J.P. Morgan Chase & Co. (JPM, 48.18, up 0.61 or 1.28 percent). Dimon is under fire by Institutional Shareholders Services (ISS). ISS wants to oust Dimon as chairman and boot three other board members off the board. ISS points to the infamous whale trade as a failure of oversight and advises shareholders to use their votes, proxy or live, to campaign for these removals at the May 21 meeting. Such votes will not be binding, however.

Another financial was a big percentage gainer today: Bank of America (BAC, up 0.64 or 5.23 percent). Bond insurer MBIA and BAC reached a settlement today. Even though New York Attorney General Eric Schneiderman apparently still wants to sue BAC and Wells Fargo over mortgage practices, BAC investors (or shorts) were buying BAC shares by the handfuls.

Coventry Health Care (CVH, 49.99, down 0.23 or 0.46 percent), is being acquired by Aetna and will be exiting the S&P 500. It will be replaced by the Macerich Company (MAC, 70.81, up 0.39 or 0.55 percent), a real estate investment trust. MAC traded four times its normal average daily volume today. Be careful before you decide to jump in with the buyers, though. This stock normally trades under a million shares a day.

Clearwire Corporation (CLWR, 3.40, up 0.02 or 0.59 percent) also made the list of story stocks. The company's board today assured minority shareholders that going forward with Sprint Nextel Corp's (S) buyout offer was in their best interest. Sprint Nextel is a majority owner of Clearwire's stock. Dish Network has offered more than Sprint Nextel. As of Friday, minority stockholders appeared to have banded together to seek other bids.

Disney (DIS, 65.06, up 0.26 or 0.40 percent) and Electronic Arts (18.29, up 0.34 or 1.87 percent) announced that they would develop games based on Star Wars. The two companies have a multi-year exclusive licensing agreement. Both were higher in after-hours trading.

Murphy Oil (MUR, 62.60, up 1.16 or 1.89 percent) announced that its president and chief executive will leave after the company sells its retail and refining operations. The current CEO will assume the president's duties. AAPL (460.71, up 10.73 or 2.38 percent) built on its gains since hitting a swing low of $385.10 in mid-April. Some market participants attributed the gain to an analyst's call for higher prices.

BMC Software (BMC) will be acquired for $46.25 per share by an investor consortium, including Golden Gate Capital, Bain Capital LLC, and Insight Venture Partners. The Government of Singapore Investment Corp. Pvt. Ltd. will also be part of the consortium. Claims have already been made that the Board of Directors and the company failed to adequately find buyers before agreeing to today's announced deal.

Companies reporting earnings today included APC, EOG, FSLR, and TSN. TSN (TSN, 24.10, down 0.83 or 3.33 percent) reported before the open. Adjusted earnings of $0.36/share fell below expectations of $0.45/share. Revenue of $8.42 billion rose from the year-ago level but also failed to meet expectations. Analysts had expected $8.59 billion. Price increases will likely keep 2013 sales at $34.5 billion.

Anadarko Petroleum (APC, 87.62, up 1.02 or 1.18 percent) reported after the bell and was last at 88.00. The company reported earnings of $1.08 per share, better than the anticipated $0.94/share. The company slightly raised its guidance for full-year sales of oil and gas to 279-287 million boe from the prior 279-285 million boe.

EOG Resources (EOG, 126.04, up 2.06 or 1.66 percent) reported after the close. Analysts expected earnings of $1.17 per share on revenues of $3.03 billion. Adjusted non-GAAP net income was $1.17 per share, and revenue was $3.36 billion. The stock was last at 130.25 in after-hours trading.

First Solar (FSLR, 46.69, up 1.69 or 3.67 percent) was last down $0.10 from the close in after-hours trading after reporting earnings, but it's been all over the place, including higher. In a pattern the opposite of what we've typically seen this earnings season, the per/share earnings missed but revenue beat expectations. The company earned $0.69/share, excluding items, when they were expected to earn $0.75/share. Revenue was $755 million, more than the expected $725 million.

Other forces impacted some markets, particularly crude. By Saturday morning, news sources began reporting that Israel may have made an airstrike in Syria late last week. Last week's strike was likely accomplished without Israeli planes entering Syrian airspace, experts noted, but the warplanes apparently did fly over Lebanon's airspace. Although no details were given, some experts speculated that Israel hit targets related to systems needed for delivery of chemical weapons. By Sunday, we learned that Israeli jets had bombed one or more sites in the wee hours of Sunday morning. One goal was apparently hitting Iranian-supplied missiles that Israel said were intended for the Hezbollah militia in Lebanon. One site struck Sunday was reputedly a military research facility north of Damascus, although up to nine possible sites, including a convoy possibly carrying anti-aircraft weapons, were listed by observers from the Free Syrian Army.

Although the Free Syrian Army observes and reports on what is happening, Syria denied that the strikes were meant to weaken Syrian President Bashar or help his opposition. As of Sunday, it was not clear whether Israel notified the U.S. before the strikes. Israel has feared that Syria might transfer SCUD missiles capable of delivering chemical weapons to Hezbollah and has warned that it would take such action if the country felt it was warranted.

Let's look at daily charts.

Charts

Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

Last Friday and today, the SPX charged up and through potential upper Keltner resistance on daily closes. Both days, the SPX punched a few points above that resistance but on neither day could it pull far away from that resistance. That punch higher without follow through so far does as much to confirm the resistance as it does to break through it. Moreover, if I had included an oscillator such as the RSI, bearish divergence could be noted on these punches higher (price higher than the previous one in early April) and RSI level (slightly lower than the previous punch higher). We know not to trust oscillator divergences opposite the current trend, but they do warn us to be watchful.

In my view, resistance held, but that opinion can be changed quite easily with a NDX-type gap higher that holds. What else would reassure bulls? The SPX has begun to reestablish a pattern of finding support on daily closes at or above a climbing red 9-ema. If the tentative bearish price/RSI divergence and failure to push far through Keltner resistance suggest caution, the reestablishment of the SPX's old rally pattern urges confidence in the new rally. Most of us need more time and more tests of the red 9-ema to feel the confidence, however.

If the SPX should pull back this week, pullbacks that find support on daily closes at or above the 1595-1604 range maintain the SPX's newly reestablished uptrend. Bulls who want to see the SPX's old rally pattern reaffirmed would want to see any daily closes remain at or above the rising red 9-ema. Then they want the SPX to bounce hard from any 9-ema retest, trend sideways to sideways up for a few days, and then rinse and repeat the pattern. Closes at or above about 1575 also tentatively maintain the uptrend, although such action would not show as much strength in the new rally as a bounce from the 9-eam, and caution should be exercised when protecting bullish profits. Bulls would want to see the SPX scramble back above the red 9-ema within a day or two if the SPX should dip as low as 1575.

Closes below about 1575 set a downside target in the range of the upper red rectangle. Consistent daily closes below about 1550-1553 are, on a Keltner basis, evidence of more weakness than has been seen since early this year and set up the potential for a decline toward 1520. Of course, the 1540 region of historical support should be watched for potential support, but the Keltner setup is for a deeper decline than 1520 if 1550 is breached on daily closes.

Annotated Daily Chart of the Dow:

The Dow's story was similar to the SPX's coming into trading today, but then the Dow was not as strong today as the SPX. Friday, the Dow broke above the top target and potential resistance on daily closes, but it very nearly closed back inside that rectangle marking the potential resistance. We needed clarification today, but the Dow neither dropped back significantly nor built on previous gains.

Dow bulls want to see gains from here. If no gains are produced before a pullback, they want to see the Dow find support on pullbacks at or above the rising 9-ema. Then they want to see that same rally pattern repeated: strong bounces from a 9-ema test, several days of sideways-to-sideways-up movements and then rinse and repeat.

Sustained daily closes beneath that red 9-ema target the 14500-14670 zone, where next support might be found, but bulls would much prefer if support were found at the top end of that range and if the Dow were then soon back above the red 9-ema. Sustained closes beneath about 14500 set a potential downside target near 14050-14200, according to Keltner evidence. Of course, on a downdraft, bears would want to be protective of bearish gains near the 14430 area where several prior swing lows can be found, but the Keltner evidence suggests the possibility of a deeper decline than that after sustained daily closes beneath 14500.

Annotated Daily Chart of the NDX:

This morning, the NDX did punch up to a higher high than Friday's, and further gains were produced this afternoon. As long as the NDX maintains daily closes at or above the 2890-2930 range, it maintains a potential upside target near 2995-3000. However, there's a big gap up on Friday, just waiting to be filled. Exercise caution with bullish hopes.

Sustained daily closes beneath the red 9-ema, however, target 2860 and then 2800-2840 if 2860 fails. The premise is that the lower boundary on the grey channel would drop into that zone if prices do, too. Lower potential targets are marked in case higher ones fail to provide support on daily closes.

Annotated Daily Chart of the RUT:

Last Friday on the RUT, resistance held just where it would be expected to hold from a Keltner view, which is a bit of a change for the RUT. The price gain did nudge the upper resistance higher, turning those upper channel boundaries to the upside, but if prices overrun boundaries on any index, it would normally be the RUT. The fact that the RUT was not leading the way by this Keltner standard is a bit of a divergence for the RUT. Today the RUT punched to a new high, too, but it lagged some of the other indices in doing so.

From a pure price-point level, the RUT has topped the March highs, but not by much. Perhaps neither pricewise nor by Keltner standards has the RUT undone the possibility of a double top formation. Bulls would like to see the RUT punch through the pictured Keltner channel resistance. Failing that, they would like to see any pullbacks find support at or above the rising red 9-ema, now just a couple of points above 940 but likely to be pushed back to 940 on a downdraft. Failure to hold the support of the red 9-ema on daily closes targets 920-933. A failure to find support on daily closes at or above 920 potentially targets 890-902.

Annotated Daily Chart of the Dow Jones Transports:

Last week, the Monday Wrap pointed out that the Dow Jones Transports' chart showed a pullback that could be a bull flag formation. That flag was somewhat wider and had proceeded long in time than was perhaps ideal for a bull flag. Friday, the flag showed its stripes, however, with the transports breaking cleanly above the top of flag. Like the RUT, however, the transports left an upper candle shadow or wick Friday, hinting that a sideways move or a pullback to retest former resistance might be next in the works. Instead, the transports pushed higher this morning, achieving a new high above March's. The push wasn't much above the March high, however, and presents the possibility of a double top formation playing out unless the transports can built on these gains. As was true with the RUT, the transports' daily candle also tested upper Keltner channels that have been turned higher by price action.

This index is not optionable, so we're not watching it for trading purposes. We're watching it to give us a view of the underpinnings of the market. The RUT and the $DJT should be leading rallies. The $DJT is at least fully participating, helping the NDX lead the pack, but the RUT lags a bit. Those wanting a rally to continue want to see the transports either break higher or at least find support on pullbacks at the convergence of the red 9-ema and the top of the former flag.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

What about Tomorrow?

The strong price action of the last few days is best viewed on a one-hour chart.

Annotated 60-Minute Chart of the SPX:

As we scan the 60-minute charts, we'll find that most indices popped up to test the upper boundaries of the Keltner channels on 60-minute charts today. The SPX was no exception. This morning's push slanted the upper channel boundary higher, too, allowing the SPX to retest it this afternoon at a higher level.

When the SPX is trending upward, it mostly finds support on 60-minute closes above a rising 9-ema, just as it does on the daily chart. That's what SPX bulls want to see occur tomorrow. The next potential support level is marked in case the SPX can't maintain 60-minute closes above the 9-ema. Sixty minute closes below about 1610 target a 1600 retest.

Unless the SPX barrels through 1600 on a retest, I would expect buyers to step back in there, if not before. The question would be whether a 1610-1616 retest would result in resistance holding.

Lower potential targets are also marked. In the case of extended gains from here, the SPX will have broken out of channels all the way up through the daily chart. It will be on a momentum run that can stop suddenly, as April's did, but can also extend longer than expected. That's what makes momentum runs as defined by Keltner channel breakouts so dangerous to trade.

Annotated 60-Minute Chart of the Dow:

The Dow also punched up to test the upper Keltner channel boundary's resistance this morning, but not this afternoon. This is one reason I like Keltner channels so much: it's easy to see divergences like this one.

Sustained 60-minute closes above the red 9-ema set a tentative upside target near 15070. Failure to hold support on 60-minute closes above about 14930 sets a tentative next downside target near 14844-14874. Lower potential targets are marked in case these don't hold 60-minute closes on pullbacks.

Annotated 60-Minute Chart of the NDX:

The NDX gapped above the outer Keltner channels this morning, dragging the 60-minute red 9-ema up out of the channels with it by midday. Because the NDX is clearly on a momentum run, we have no new upside target up through this 60-minute chart. For new upper target possibilities if the NDX keeps climbing, turn back to the daily chart.

The NDX's behavior can be watched with respect to the lower grey channel boundary for some clues. Unfortunately, as is visible on this chart, the red 9-ema hasn't been particularly predictive for the NDX this last week. The location of the lower Keltner channel boundary--whether the NDX holds support there and bounces--has been more predictive of bullish versus bearish behavior, but many of you do not have access nor want to follow Keltner channels. You might try watching the NDX with respect to more familiar Bollinger Bands, although I have not tested this theory.

Keltner channel boundaries just below the NDX's current level, boundaries that ordinarily would have been resistance now serve as support. Bears or those who just want a break from these monumental gains made since the middle of April would first need to see the NDX sustain 60-minute closes below that grouped resistance. The red 9-ema, easy to put on any chart (although it doesn't have to be red, of course), will be a good guide to this first-step change although it's not as predictive for the NDX as it is for some other indices.

Gap support might be most readily found at the top, bottom or halfway down the gap, so watch for potential support to kick in at those levels if the NDX retests the gap. If gap support fails on pullbacks, then the next downside target might be 2900-2906. Other potential downside targets are marked on the chart, if needed.

Annotated 60-Minute Chart of the Russell 2000:

Unlike the NDX, the RUT did not overrun boundaries today but adhered to them. That's a divergence from typical behavior. The RUT ran straight up to next Keltner target, also potential resistance on 60-minute closes, this morning and pulled back. Although the RUT, too, nudged that potential resistance higher, the RUT never quite touched it again, despite the RUT's slightly higher high in the afternoon.

Bulls want to see the RUT charge up higher, potentially toward 963-966. If it's not charging higher, they want to see it hold the support of a rising red 9-ema on 60-minute closes. Failing that, they want to see support hold above about 953-957 on 60-minute closes. Failure to hold and bounce from one of those levels risks a decline toward 943-947. Lower potential targets and support on 60-minute closes are marked on the chart.

What do I think? I was rather surprised from the formations on the 60-minute charts that the various indices didn't mount end-of-day rallies. Scan across those 60-minute charts from this last week, and you'll see what I mean. Look at other times we've seen prices trend mostly sideways, and those have been followed by gains. Several indices seemed to run out of steam. If they they're going to follow recent patterns, they probably should bounce up tomorrow morning. That doesn't mean they will, but we can see another divergence if they don't.

We can't ignore the breakouts. Today's action included, variously, action that built on those gains and a sideways digestion of gains. I don't entirely like the mix of equity indices making the biggest gains and those trading sideways. I especially don't like and trust the truly anemic volume we saw today. Due to those reasons, I don't feel entirely confident of these gains, but I do have to honor what I'm seeing. I don't like the fact that both the Dow (defensive stocks) and the RUT (the riskier darling of momentum traders) lagged by Keltner measures, for example. If BAC hadn't zoomed up today, the Dow's performance would have been much worse than it was.

What I'm doing with my own trades is adjusting to account for the upside movements when I need to do so but making the most modest adjustment that seem reasonable while also preparing my trade for the next day's move. For example, today I moved up butterflies to a higher center strike, but I moved only half of them. I have one wing in the bullish camp and one in the bearish camp, I guess you'd say.

The next few days should tell the tale. Further gains or even sideways movements while daily 9-ema's rise up close beneath the consolidation will engender more confidence. Until then, I'm making the most modest adjustments I can and preparing for anything.